An American politician Alexander Hamilton said: A national debt, if it is not excessive, will be to us a national blessing. External debt refers to the money borrowed by a country from foreign investors. Debtors can be sovereign nations, corporations or private individuals. The debt itself can take the form of money owed to private banks, external governments and global financial institutions including the World Bank or
International Monetary Funds. Early phase of economic development,
developing countries gather foreign debt as high existing account
deficits, shortfall of domestic saving and capital stock. For this
purpose, imports are necessary to boost up domestic resources.
External debt is applied as a tool to reduce the gap between domestic
savings, investments, exports and imports. This kind of debt permits
economic policy makers to spend and invest more by providing surplus
sources to current total sources in an economy in a definite period. If
appropriate implementation and achievement of financial sources from
external debt provide positive contributions and decrease the level of
poverty for the countries which have low economic growth. On the other
hand, if the attained external debts are distributed uneconomically,
cost of debt from external sources cause macro-economic management
problems. In general, applied standard for
an adequate level of external debt is that the net present value of
external public debt should be less than 150% of its exports or 250% of
its revenues.
The external debt is categorized into different types including
External debt versus GDP, Dangerous debt and Tracking the debt. In  external
debt versus GDP, economists compare the external debt with Gross
Domestic Product which means how many manufacture of goods and generate
money to pay off their debt. Devaluation of currency is one of the main
factor which can lead to wider economic downfall within a country. In
dangerous debt, Government used foreign currency to meet up domestic
expenses which create problematic situation for the country if external
debt costs engulf the public sector. In tracking the debt, government
tend to track the external debt of other states. Besides, various global
bodies such as World Bank, IMF keep records and get involved in
handling external debt, negotiating repayments and offering low interest
loans to countries to pay back their debts.
In developing countries, an increase of external debt is regarded as
common phenomenon of the fiscal sectors of most of the economies. A
country with lesser saving rate requires to borrow more to finance the
given rate of economic growth. Therefore, external debt is acquired to
withstand the growth rate of the economy which would not achievable with
the certain domestic resources. Pakistan is one of the developing
countries and faces serious debt problems. According to World Bank
report (2000-2001), Pakistan is among the Highly Indebted Countries; as
Pakistan’s present and future debt situation is quite gloomy.
In 1947, at the time of independence, rate of domestic saving was too
low to finance economic growth through productive investment. As a
result, Pakistan decided for external borrowing to hasten the economy
growth rate with the assessment that in future increased growth rate
would raise the saving rate and generate plenty of exportable surplus to
step down the debt. Till 1960, this growth strategy remained successful
and perceived a high level of economic growth. Unfortunately, Pakistan
suffered serious external debt problem due to various factors.
Firstly, oil price increased by Organization of Petroleum Exporting
Countries in 1973/74 which led to decline in the external payments
position of the oil importing developing countries and forced many of
them including Pakistan to borrow heavily. Secondly, Pakistan suffered
from these global events of exceptional nature which forced severe
pressures on its Balance of Payments and debt servicing liabilities
occurred. In addition, inappropriate implementation of macro-economic
policies, political instability, corruption and poor law and order
situation are the key internal factors for rapid growth of external debt
in Pakistan. In 1970, the value of external debt was $ 3.4 billion
which went to $ 9.93 billion in 1980 and it is doubled approximately $
20.66 billion. In the last few years, external debt increased at an
extraordinary rate and went to $ 54.60 billion in 2010. According to
World Bank Report of 2014, the external debt of Pakistan reached to $
65.5 billion.
From the policy prospective it is recommended that increased domestic
saving and export earnings could also raise the estimated growth rate
and reduce the dependence of the economy on external debt. It is very
important to build conducive environment for investment and much focus
of the policies should be based on the inflow of Foreign Direct
Investment, whereas the inflow of debts should be lessened. There is
severe need of deep monitoring and consistent debt management strategies
to avoid the misutilization of external debt.
In order to reduce debt burden, Pakistan can use export marketing
strategies and take appropriate steps to boost its export. To begin
with, reduce inflation rate because if domestic inflation is higher
compared to inflation in the counter trading partners, which leads to
discourage exports. To increase its exports it also needs to rise its
access to foreign market, predominantly to the European Union and USA
for its textile exports. Then, Pakistan has to alter its imports from
consumer goods to capital goods as capital goods are generally linked
with enhanced productivity and higher revenues over the investment. To
upsurge foreign investment inflows, Pakistan has to improve law and
order situation and business condition. Also, external trade strategies
should be supported by strategies intended at mobilizing domestic
savings and external investment. Lastly, an in-depth assessment of
policies and plans introduced by the World Bank and IMF which is
unavoidable as some of the packages are badly disturbing the Pakistan’s
economy.
Source : http://economicaffairs.com.pk/external-debt-reason-behind-this-season-in-pakistans-economy/
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